Weekly Purcell/Roberts Agricultural Commodity Market Report

Mike Roberts
Commodity Marketing Agent
Virginia Tech

March 14, 2006

The USDA World Supply/Demand report showed, as expected, in line with pre-report expectations.  Other factors such as the USDA March 31st Prospective Plantings Report, Quarterly Gain Stocks report, and weather in the wheat and corn belts will be the more likely market movers.  Rain activity in the Southern Plains will be a key fundamental to watch.   As of this report 90% of the Texas wheat crop is rated poor to very poor with crop conditions not much better in Kansas and Oklahoma even though fresh showers have been beneficial in some areas.  Crop moisture needs are more of a concern as soil moisture levels are much lower than a year ago.  Also, reports of a Mad Cow case in a beef herd in Alabama were confirmed after the markets closed on Monday.

CORN futures on the CBOT closed lower Monday feeling the weight of a weaker wheat market and technical selling.  Predicted showers for the wheat and corn growing areas capable of recharging crop prospects set the bearish tone.  After opening at the day’s high of $2.234/bu, buoyed by news of U.S. on target export expectations, the MAR’06 corn contract closed 5.4¢/bu lower from Friday’s close at $2.204/bu with the DEC’06 futures down 5¢/bu at $2.58/bu.  Reduced feed demand in the poultry and beef sectors pressured price amid news of spreading bird flu in Europe, Asia, Africa, and the Middle East and of news USDA was investigating a third U.S. case of mad cow disease.  About 55%of the U.S. corn crop is fed to livestock each year with cattle the largest demand sink.  Midwest spot basis bids for corn were mostly steady early Monday amid slow farmer sales.  Cash bids were slightly stronger for corn in the Mid-Atlantic States. Volume, estimated at 101,518 futures contracts, was heavy nearing the level of last Friday with funds selling about 4,000 corn contracts.  Commodity Futures Trading Commission data from last Friday showed large speculators net long by a 3-to-1 margin in CBOT corn futures & options.  The 2005 corn crop should have been long since sold by now.  It is highly recommended that cash sellers be forward priced in up to 50% - 60% of the 2006 crop. It would not be a bad idea to consider pricing up to 15% - 25% of the 2007 corn crop.  The DEC’07 corn contract closed at $2.732/bu, down 1.4¢/bu from the last close.  An out-of-the-money call option could be considered to protect the ’07 crop but should not be in place on the ’06 crop.

SOYBEANS on the CBOT traded lower with the MAR’06 soybean contract closing down 4.6¢/bu at $5.734/bu and the NOV’06 futures at $6.110/bu, down 3.6¢/bu amid technical setbacks after Friday’s rally and a bearish crop report from USDA.  As with corn, better weather prospects for the crop, bird flu off-take concerns, and abundant ending stocks weighed on the market.  March deliveries were heavy at 539 lots on Monday, reminding traders of ample supplies.  Export intentions offered little support for prices as exports continued to trail year-ago levels.  CFTC trade data from Friday showed that large speculators (funds) hold a small net short position in CBOT soybean futures/options of about 1,600 lots.  Cash basis bids were mostly steady in the Mid-Atlantic states on Monday with opening bids 1¢/bu to 2¢/bu higher.  Cash sellers should consider having up to 50% of the ’06 crop priced at this time.  Hedgers should maintain short hedges on up to 50% of the crop as well.  Realizing it most likely will take widespread weather and asian rust problems to take November beans above $6.00/bu near harvest it could be smart move to consider an out of the money call on the ’06 crop.

WHEAT futures on the CBOT tumbled in early trading on Monday amid disappointing export news and rain forecasts for the U.S. Plains.  The MAR’06 wheat futures on the CBOT finished down 14.4¢/bu at $3.60/bu with the JULY’06 contract at $3.794/bu, off 14¢/bu.  Wheat in Kansas City (KCBT) dropped almost 2% in early trading on Monday amid news of rain in wheat growing areas of the U.S.  The MAR’06 wheat contract on the KCBT finished off 19¢/bu at $4.28/bu and the KCBT JULY’06 wheat was off 22¢/bu at $4.374/bu amid quiet fund liquidations taking gains.  According to floor sources, traders were, “just following the weather” expecting crop-friendly rainfall in the U.S. winter wheat belt.  Drought has been stressing the U.S. winter wheat crop but showers are showing up to boost early growth of the 2006 hard red winter and soft red winter wheat crops.  There was nothing in the export market to buoy wheat futures.  Rumors on the floor were that Iraq was looking for 500,000 tonnes of Australian wheat prompting accusations by global grains trading giants that Australia’s AWB Ltd. was “stonewalling” to freeze them out of an export tender to Iraq.  USDA said Monday that 22.6 million bushels of wheat were inspected for export last week.  This was more than expectations of 15 – 22 million bushels.  CFTC Commitments of traders report for futures and option combined showed long funds down 1,596 lots from the previous week at 51,628 and funds in short positions off 1,022 lots at 4,831 contracts.  Technical support in the KCBT May contract was at $4.302/bu and resistance placed at $4.561/bu.  Cash sellers should have considered pricing up to 45%-50% of the ’06 crop on last week’s advice.  An out-of-the money call option is no longer justified on the ’06 crop.  Realizing a weather market is always risky a market rally is still not expected at this point.

LIVE CATTLE futures on the Chicago Mercantile Exchange (CME) traded choppy with nearbys up mostly on short covering and bear-spread unwinding.  The APR’06LC closed up $0.175/cwt at $83.625/cwt and the JUNE’06LC at $79.125/cwt, up $0.025/cwt.  Trading was active on the CME as the Goldman roll in the June/April in live cattle continued rolling 6,000 lots with an estimated overall volume for APR’06LC at 14,000 lots and the JUNE’06LC at 12,000.  However, unwinding of bear spreads offset fund rolling with many traders holding those spread exiting the market.  News of Mad Cow disease pressured the market but most months still inched higher at closing with floor sources noting “The last time we had one of these (possible mad cow cases) it didn’t amount to anything.  Enough of the export market for beef hasn’t been recovered to make much of a difference.”  The case was confirmed after the markets closed on Monday, this time in a beef herd in Alabama.  The suspect animal was born before the 1997 feed ban.  About 55%of the U.S. corn crop is fed to livestock each year with cattle the largest demand sink.  This news could slow the resumption of U.S. beef exports to Japan amid concerns that South Korea would also cancel its plan to import U.S. beef again.  It will be several days before final test results are known.  Domestic beef sales are still strong despite two previous cases.  Cash cattle were off $2/cwt from the previous week in the Plains trading at $86/cwt.  Bird flu, and now this recent mad cow report are keeping these markets nervous.  Hedgers with already-profitable short positions in the APR’06LC and JUNE’06LC contracts should consider staying on those positions.

FEEDER CATTLE started lower setting new six-month lows on Monday before turning around following live cattle by closing.  Short covering emerged on improved forecasts in dry areas sinking CBOT corn futures.  Feeder cattle were pressured by dry weather as it was expected that sellers would have to move more beef to the market sooner rather than later.  The MAR’06FC closed up $0.45/cwt at $102.025/cwt and the APR’06LC at $103.425/cwt, up $0.475/cwt.  The latest CME feeder cattle index for March 9 finished at $103.98/cwt, off $0.80/cwt.  As with other markets, the Goldman Roll was affecting this market.  A stronger dollar amid fears of rising interest rates also caused concern for market direction, according to floor sources.  Both the APR’06FC and the MAY’06FC show an oversold RSI of 26.90 and 27.93 respectively.  A market is said to be oversold when the Relative Strength Index is lower than 30.   What does this mean?  With the 14 day RSI, and the 4-day,10-day, & the 20-day Moving averages headed in the same direction and current fundamentals in place, there could be some upside potential for beef due to fund activity and fears of bird flu pushing more people to reduce poultry purchases.  Feeder cattle sellers should be short in the APR’06FC and MAY’06FC protecting 2nd quarter sales with an eye on the markets to take advantage of any upside moves. 

LEAN HOGS on the CME finished higher after opening in light buying.  The APR’06LH futures contract closed at $59.725/cwt., up $0.968/cwt.  The JUNE’06LH futures closed at $68.625/cwt, up $0.475/cwt.  The higher cattle market helped lean hogs amid lessening fears that one mad cow could hurt the cattle market.  Spreading in the APR’06LH contract also provided additional support as April’s price appeared to be low compared to the June contract.  As with beef, hogs were expected to take their share of gains due to bird flu worries for the poultry sector.  USDA on Friday lowered the 2006 poultry exports estimate by 2%.  The latest CME lean hog index price was down $0.21/cwt at $62.00/cwt.  The average pork packer cutout margin for Monday was $4.25/cwt, down $1.30/cwt from Friday’s $5.55/cwt and down $3.95/cwt from $8.20/cwt a week ago, according to HedgersEdge.com.  It is worth taking a look at the HOG/CORN ratios calculated by Dow Jones.  Ratios are calculated by using industry-accepted FOB cash-hog prices from USDA and cash corn prices from private sources.  Historically ratios at or above 20-1 for hogs on a live basis have resulted in production expansion while a ratio of 15-1 or less has resulted in herd contraction.  It is obvious from the tables below that higher corn prices contribute to expansion or contraction of the hog herd.  The trend shows that the swine industry is poised with ample supplies to meet any increased demand brought about by disparaging effects of bird flu on the U.S. poultry supply.

HOG/CORN RATIOS:

For Iowa / S. Minnesota:

For Des Moines

Nevertheless, June's bearish premium to CME's hog index, plentiful meat supplies and the possibility that live cattle futures may not sustain significant damage as a result of the mad cow situation could minimize pork future's advances.  Hedging buyers should sit tight out of this market.  Last week sellers should have been short in the JUNE’06LH contract to establish a price floor at $68.00/cwt to protect 2nd quarter marketings.  If that target was missed, consider a short hedge at the $66.50/cwt level as there is a cluster of sell orders sitting between $66.50/cwt and $67.00/cwt.

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Remember, when working with futures, risk is involved. Past performance does not indicate a promise of future results. For comments or questions you may contact Mike Roberts at mrob@vt.edu or (804) 733-2686.